Wesfarmers to win hardware battle
Wesfarmers to win hardware battle
Woolworths thinks the hardware market is ripe for the picking. But there’s a big bad scarecrow in this orchard, and it goes by the name of Bunnings.
With all the glowing media commentary surrounding Woolworths’ entry into the hardware and home improvement market, you’d be forgiven for thinking success was a foregone conclusion. But, for what it’s worth, I’m about to make a bold prediction: Woolworths’ long-awaited and much-vaunted expansion into home improvement will never displace Wesfarmers’ Bunnings as the market leader.
But wait a minute, maybe this isn’t a bold prediction at all. Let’s take a look at the facts. Bunnings has a huge lead over Woolworths, with almost 160 large format, ‘big box’ stores already trading in Australia (and more than 30 small format stores). Woolworths has only secured 12 sites thus far, with a further 15 ‘under negotiation’.
Woolworths’ first home improvement store won’t open for business until 2011. It has taken Bunnings more than a decade to secure 160 large sites, and then open stores. And it also had the benefit of a free kick from the 2001 takeover of Howard Smith, which owned the BBC Hardware chain. It seems a particularly ambitious target for Woolworths to secure 150 suitable sites in less than half the time, especially given the difficulty Costco, Bunnings Warehouse Property Trust, and Woolworths itself have had finding and developing sites in recent years.
Fragmented Market
Rather, Woolworths’ entry is likely to accelerate the decline of the smaller independent hardware stores and banner groups. Indeed, Woolworths’ takeover of the Danks distribution business, which supplies the independently-owned Home Timber & Hardware, Thrifty-Link and Plants Plus retailers is bad news for these banner groups, however reassuring Woolies might be about them remaining the ‘lifeblood of the business’. It’s also no secret that Mitre 10, the most significant hardware brand after Bunnings, has been struggling for some time. Lights out time for some of these players, perhaps?
Another fact is that Bunnings, as the ‘first mover’ and strongest player, is in the fortunate position of being able to meet any competition easily. Its 2009 earnings before interest and tax margin was an impressive 11.3%, which is no doubt what attracted Woolworths to this market segment in the first place. Anyone who has visited a Bunnings store will know that its prices are indeed lower than the independents, so there is room to move here.
Bunnings, then, could make life extremely tough for Woolworths’ new venture over the next five years. It can afford to lower prices to undercut the new venture and still remain extremely profitable at a time when Woolworths will be incurring enormous costs. Time and again, history has shown that new entrants struggle to gain traction against an entrenched player. Woolworths will need those famously deep pockets.
A counterbid for Danks?
This also presumes that Woolworths’ bid for Danks is successful. It’s possible that Wesfarmers will make a counterbid. While that wouldn’t stop Woolworths from entering the sector, it would certainly frustrate its plans and show that Bunnings means business.
Of course, if new competition comes, it won’t be good news for Bunnings’ margins. But the adulation the market had for Woolworths’ expansion into the home improvement market seems more than a little misplaced. While there’s no doubt Woolworths is a smartly run company – and the tie-up with Lowes improves the venture’s chance of success – this move also has a whiff of desperation about it. Woolworths’ Michael Luscombe has spent the past few years trying to buy various businesses, including Kmart, Target, and Officeworks from Coles/Wesfarmers, JB Hi-Fi, Warehouse Group, Mitre 10, Corporate Express and Reece. He also has a team of investment bankers scouring the US for deals. None have yet come off, and he needs something, anything, to maintain that hallowed double-digit growth.
Five years hence, there’s a good chance Wesfarmers’ shareholders will look back on Woolworths’ home improvement plans and wonder ‘What were we worried about?’. Unfortunately for Woolworths’ shareholders, there’s a much greater chance that they’ll be asking: ‘What on earth was Michael Luscombe thinking?’
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I was just about to put this on ask the experts....better here though....good article JG.
Further to JG's warranted skepticism of WOW's hype and ambitious claims for the hardware market there is one statistic in the presentation WOW I wouldn't mind a double check on.
WOW is suggesting the market size potential of the home improvement market is $24 billion (2008 number). That is a big number leaving Bunning’s with an only moderate market share and a lot other/unknown players which doesn't make sense when all the main players are named. So I checked some numbers from IBISworld from 2005 and the market size for Domestic Hardware Retailing was only $10.4 billion with Bunning sitting on 32% which sounds more realistic. Allowing for three years of market growth doesn't get close to $24 billion so WOW must be adding all kinds of activity that really aren't going to be in their domain.
Even adding in floor coverings, nursery etc it looks like the market size number presented was made bigger than it really is to make the opportunity look bigger and to make Bunning’s look smaller and less formidable than they really are. Any ideas on what really is the market size of WOW’s opportunity?
p.s. Danks aint no Dan Murphy's - WOW are ging to find out what it feels like against someone like Dan's - it is going to hurt.
Yes, market share figures are always a bit rubbery, and hard to get a handle on. My understanding is that Bunnings itself considers the market to be worth $36bn, as compared with Woolworths figure of $24bn. I've read some stuff that suggests Woolworths' format will be broader than Bunnings' hardware offer and may include selling appliances (watch out Harvey Norman?), plumbing supplies and bathroom and kitchen renovations (Reece?). But when you measure only retail hardware (not including trade), then $10bn-$12bn sounds right, and Bunnings would have a much larger share of that market as you've indicated.
A broad offering sounds dangerous...no man’s land unless it is done like Costco - no category killers but low prices. I think I would want to back the specialists or more focused operators unless WOW manages to get some exceptional merchandisers at ground level. This is clearly WOW's biggest retailing test ever - any idea how much capital they may end up risking on it for their 2/3rds? Bunning’s have $2.2 billion in at 31% return and I would suggest that is cheap (or is that an obvious statement lol)
HI, Just wondering how WOW can own the distributor, Danks, and then compete with its customers. Would the ACC have a say in this?
Thanks,
MAR
I tend to agree, but at the same time don't want to underestimate Woolworths/Lowes. Perhaps there's an opportunity that they're seeing. Has anyone been to a Lowes in the US? What is the format like compared to Bunnings? As for capital, each store will probably require between $20m-$25m total, which for the number of stores being planned, would probably require Woolies to invest about the same amount of capital as Bunnings currently has invested.
I can't see any legal problem here - the ACCC is all for competition, and Woolies is providing some. The likely side effect, though, is that the independents will end up being squeezed between the two much larger players. It's not completely uncommon for large companies to act as both competitor and supplier. From memory, Woolworths used to have a (grocery) wholesaling division that supplied non-Woolworths stores, although there's an obvious conflict. If I was an owner of a Home Hardware or Thriftylink store I would now be looking to source product elsewhere given the conflict of Woolies owning Danks. But it doesn't really matter for the independents long term - they aren't going to be able to source product as cheaply as Bunnings or Woolies/Lowes whatever they do. They are in a precarious competitive position and they had better find a market niche quickly.
Regarding potential impact on Harvey Norman, all I can say is that WOW has faced off against HVN before (Dick Smith). If the new threat is as menacing as Dick Smith, then I don't think HVN will be losing any sleep. Though I'm sure the guys at HVN wouldn't be so silly as to disregard a threat from WOW. But, as JG has already said, competing against an enrtenched player is tough. Personally, I'd rather compete against JB than HVN - the JB format is clearly in need of some competition!
to mix up a bit of the Pumpa and Paul Keating - ring-a-ding-ding HVN is still the King - they are a beatuiful set of numbers HVN just released. Especially allowing for Ireland. I'm with you Mars, WOW will have to lift their game in this space.
It's perhaps stating the obvious, but in terms of capital requirements, Woolies could always avoid owning the land and building, like with the Bunning Warehouse Property Trust. Maybe that's part of the reason for the high return on capital for Bunnings. So perhaps Woolies don't need to invest $20m-$25m per store
I guess my concern is WOW's offering turns into an OFIS or to a lesser extent 1st Choice Liquor situation so the capital spend is important to comprehend the write off potential of the situation. But on the other hand limiting the downside loss potential could be softened by where the stores are located....if WOW needs to exit because it doesn't get enough traction in time i.e. this process fails, than they may be able to sell stores as going concerns to Mitre10 or even Bunnings to be rebadged i.e. if close to a Bunnings store sell to Mitre10 and if close to a Mitre10 store exit to Bunnings, if close to neither maybe they both want it. If the downside is truly limited because any footprint made is valuable maybe this is a relatively free swing for WOW?
I have a mate (buddy?) in the US who uses both Home Depot and Lowes – they are different formats where Lowes apparently specialize in lumber as he calls it. So perhaps Lowes/WOW may specialize in sectors of the market and try to gain some footing that way.
My mate over there also tells me he plays one off against the other and because they are so apprehensive about each other good deals can always be done. So perhaps this will be a good time for customers.
Yes, it does seem to be the general trend doesn't it? I mean that it tends to be injurious to ones wealth to write off companies run by independent minded, straight talking, non MBA holding, operators. Anybody brave enough to write off FLT?
Absolutely spot on...but I might have to draw a line in the sand with these types of operators dress style.....purple socks? (or are they stockings he is wearing?). See Kerr Neilson's picture page 35 of todays Financial Review Magazine.
Having looked at Lowes USA catalogues and interactive shopping website its not just hardware and is much wider than Bunning's. In fact IMO there is a gap as this attacks all the way from Ikea to carpeting. I however think that the format will be modified here.
I think its good for competition if they bring the whole format out here but the smaller independent and the franchised chains will be dead in the water.
I think that its like Aldi's and Costco a few select sites and a long time to get the correct space and location. Hyper market type stores are nothing new but as we suffer from a lack of personal time I think that the USA format wont be the enormous success that they think it will be.
We work and few of us have domestic cleaning services so a trip to these stores much like Ikea is a big chunk of time and not done every week.
Let me float my idea:
This is an idea and it will get built but its more of a threat to WES to say listen your cash cow may have competition you better focus on it as well as regenerating the other Coles brands. I think its the first in a line of positioning to help slow down the WES process its not a real challenge. After all who tells you that I am coming after you but will only be there in a few years time.
This is not threat to WES but confirmation they are making progress.
I'm not entirely sure where you're coming from there - I would have said that Dick Smith's most direct competition is JB HiFi rather than HVN. In terms of product offering Dick Smith are mostly Audio/Visual hardware with some computer and other electronic gear - you'd find a similar offering at JB. No whitegoods or furniture or consumer electrical (toasters Vacuum cleaners etc) like you will find at HVN. Good Guys or Bing Lee are more closer to being direct competition to HVN (without the furniture).
Wesfarmers is the way to bet. The big frog who leaves his big pond for a smaller one, and thinks it'll be easy to displace the smaller frog, is usually in for a nasty surprise. It's happened quite a few times in North America, and I don't see why it would be any different in Australia.
OK, so instead of talking about HVN in its entirety, we can narrow it down to the HVN Electronics-AudioVisual-Computers segment. I think the point remains. Given how successful JB is demontrating to be, and given how much growth it is displaying, one would think there would be more room there for new entrants, ie entrants chasing the same demographic/market. And I guess capitalism, being what it is, that will happen, and all those investors chasing yesterdays growth will get caught out - again...
Perhaps this comment won't add too much to the debate about the merits of either WOW or WES as an investment, but the first one to get a decent online catalog going with prices will satisfy a very large number of customers. Try either Bunnings or Mitre 10's online offerings and then have a look at Lowes. If Lowes can bring their catalog across then I suggest Bunnings are in trouble or they will at least have to spend significantly to catch up.
cheers
Why do you think an online catalogue is so important to this kind of business?
Hi Mars,
Been doing some research for a kitchen, laundry, toilet and pergola extension - can seek out just about everything to do with the kitchen and laundry on the net but when it comes to hardware you get no where. Second my mate (buddy) in Houston wouldn't buy an item of such material without first doing some comparison effort on the net. Whenever I mention to him a tool I might be interested in he can immediately send me about three links as to what is available in costs and comparisons. Very handy information to have before you commit to the purchase.
And I stand corrected on the spelling of catalogue.
Interesting, I guess for big ticket items this sort of research on the net makes sense. I wonder how much of Bunnings business is of this nature, though. I know when I need something, I'll rush out the morning of the weekend I'm aiming to do a job, and just go to Bunnings and decide what I need when I get there - after recieving all that expert (????) advise. On the other hand, if I'm after something smaller or more specific, and it doesn't merit the drive out to Bunnings, then I'll go somewhere more local. Usually I want the items in a hurry, to leave enough time to get the job done ( and better yet, leave some time for a beer, and perhaps do some reading). The last thing I want to do is spend time on the net beforehand. But then, I'm not the worlds greatest example of a home handy-man - so what would I know...
Mars,
And I have done and still do exactly the same as well. But we do this because there is effectively no competition - if there was another store nearby then which store to choose to make the purchase?
I find online catalogues fascinating and a good one almost invites you in to make the purchase. So perhaps a good on-line catalogue may be just enough to make that point of difference.
cheers
I found this article a little Wesfarmers-centric for a comparative review (no doubt in response to the "glowing media commentary"), in the sense that it made the case for why Woolworths expansion into home improvement will not displace Bunnings as a market leader. But I don't see that market leadership is necessarily mutually exclusive with Woolworths earning an appropriate return on its expansion, particularly if the market continues to grow and if it gains market share from Mitre 10. Consequently, I think the article sets the bar of "success" for this venture a bit higher for Woolworths than it necessarily needs to be, particularly since Woolworths does not even appear to have declared that becoming market leader is its ambition or expectation.
The article also appears to be a bit critical of Woolworths:
(i) The expansion is described as having a "whiff of desperation about it". But what other kind of expansion is Woolworths supposed to be undertaking, particularly given the TII's scepticism of overseas expansions? Expanding into home improvement seems to me to be a logical step.
(ii) The article on TII's website refers to "the Woolworth's spin machine". I'm not privvy to analyst briefings, but Woolworth's public pronouncements actually seem quite modest by comparison to much of the publicity that appears to have been driven by the media itself.
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